Oil settled at the highest level since March after a volatile session in which investors toggled between bullish underlying fundamentals and fears of taking on risk due to inflationary concerns. 

West Texas Intermediate topped US$120 a barrel, with the market putting greater weight on bullish fundamentals. Goldman Sachs Group Inc. boosted its quarterly price estimates saying that crude needs to rally further to achieve the demand destruction required for market re-balancing. Morgan Stanley added that it sees upside to its bull case estimate of US$150 a barrel in the third quarter. 

“The true fundamentals in crude, gasoline and diesel remain bullish, although prices have risen a bit too far too fast,” said Dennis Kissler, senior vice president of trading at BOK Financial. The Energy Information Administration revised down their forecasts for gasoline consumption in its latest monthly report, but as long as inventories remain so far below the 5-year average it’s extremely bullish, he said.

Oil hit a three-month intraday high on Monday amid rebounding demand from China and a significant tightening of the market following Russia’s invasion of Ukraine. The Bloomberg Spot Commodity Index began the week by rising to a record, mostly driven by natural gas and wheat due to renewed supply fears. Adding to supply worries is a forecast by the EIA that the European Union’s latest Russian ban would result in an 18 per cent drop in the country’s fuel output by end 2023. 

The war in Ukraine has fanned inflation, boosting the price of everything from food to fuels. The US is grappling with record pump prices at the start of its summer driving season, typically a period of peak demand, while developing nations are suffering from the rising cost of energy.

Prices

• WTI for July delivery gained 91 cents to settle at US$119.41 a barrel in New York.
• Brent for August settlement rose US$1.06 to US$120.57 a barrel.

The oil market will likely be in a deficit of 500,000 barrels a day in the second half of the year, Morgan Stanley analysts Martijn Rats and Amy Sergeant wrote in a report. Goldman wrote in a note that the market remains in a structural deficit and was even tighter than expected in April. The bank increased its third-quarter price forecast for global benchmark Brent to US$140 a barrel and its estimate for WTI to US$137 for the same period.

Generally, analysts are raising crude forecasts even as global GDP numbers are revised lower because of oil supply shortages expected for the rest of the year, said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. Though she warns, “I am concerned US demand will not live up to expectations and we will see demand destruction here.”